Table Of Content

THE LEWIN GROUP ESTIMATESOFTHEINCOMEAND WEALTH OFTHEELDERLYUSING THEPANEL STUDYOFINCOMEDYNAMICSANDTHE SURVEYOFCONSUMERFINANCESAND THEIRIMPLICATIONSFOR LONG-TERMCARE FINALREPORT Submittedto: HEALTHCAREFINANCINGADMINISTRATION Submittedby: KevinA.Coleman TimothyM.Dall THELEWINGROUP Revised: June12, 1996 Fairfax.Virginia Sausaino,California TABLEOFCONTENTS Page EXECUTIVESUMMARY i ChapterOne:OverviewoftheLiteratureontheEconomic StatusoftheElderly i A. TheEmpiricalLiterature i B. TheTheoreticalLiterature Hi ChapterTwo:EstimatesoftheIncomeandAssetsoftheElderly iv A. Income iv B. WealthandAssets v C. TheAffordabilityofLong-TermCare vi ChapterThree:SimulationResults vi CHAPTERONE: OVERVIEWOFTHELITERATUREONTHEECONOMIC STATUSOFTHEELDERLY 1 I. Overview 1 II. TheCurrentEconomicStatusoftheElderly 1 A. HowistheEconomicStatusoftheElderlyMeasured? 1 B. CurrentMeasuresofElderlyEconomicStatus 3 C. ThereisConsiderableDiversityintheIncomesandWealthofthe Elderly 4 D. ElderlyPovertyisaMajorConcern 7 E. TheElderly'sRisksofIncurringCatastrophicMedicalExpensesAre High 7 II. TheoriesExplainingtheSavingsBehavioroftheElderly 9 A. TheLifeCycleTheory 9 B. ThePrecautionaryMotiveTheory 12 Page C. TheBequestMotiveTheory 14 CHAPTERTWO: ESTIMATESOFTHEINCOMEANDASSETSOFTHE ELDERLYFROMTHEPANELSTUDYOFINCOME DYNAMICSANDTHESURVEYOFCONSUMER FINANCES 21 I. Overview 21 II. DescriptionoftheData 22 A. ThePanelStudyofIncomeDynamics 23 B. TheSurveyofConsumerFinances 25 C. OtherDataSources 27 III. TheIncomeoftheElderly 30 A. IncomebyHouseholdCharacteristics 31 B. TheIncomeoftheElderlybySourceofIncome 36 IV. TheWealthandAssetsoftheElderly 48 A. NetWorthbyAge 49 B. TheTypesofAssetsOwnedbyIndividualsAge55andOlder 55 C. TheCorrelationBetweenIncomeandAssets 60 V. UsingthePSIDandSCFtoEstimatetheAbilityoftheElderlytoPurchase Long-TermCare 63 VI. Conclusions 65 CHAPTERTHREE: SIMULATIONRESULTS 67 I. TheModel 68 A. SpecifyingtheModel 68 B. TechnicalIssuesandProblems 70 II. Results 72 A. Overview 72 Page B. Findings 73 III. Conclusions 81 BIBLIOGRAPHY 90 APPENDIXA: SPECIFYINGTHESIMULATIONMODEL APPENDIXB: INCOMEANDASSETTABLES EXECUTIVESUMMARY TheHealthCareFinancingAdministration(HCFA)contractedwithLewin-VHIfor atwopartstudyoftheincomeandwealthoftheelderly. Thefirstpartofthisstudy consistedofadetailedreviewoftheliterature.1 Aspartofthisreview,wedetermined severalofthegapsinthecurrentempiricalliteratureinvestigatingtheincomeand wealthoftheelderly. Tohelpfillsomeofthesegaps,thesecondpartofthisstudy usedtworecentdatasources,the1983to1992SurveyofConsumerFinances,and the1983to1991PanelStudyofIncomeDynamics(PSID)toprovideupdated estimatesoftheincomeandwealthoftheelderly. Thispaperdescribestheresultsof thesecondpartofthisstudy. Below,webrieflyreviewourprincipalfindingsfromthethreechaptersinthe secondpartofourstudy. InChapterOne,wesummarizethemajorpointsofour previousliteraturereview. InChapterTwo,wediscussourdetailedempiricalestimates ofelderlyincomeandwealthmeasures.Finally,inChapterThreewereportthefindings ofasimulationmodelthatusesdatafromthePSIDtoestimatechangesinelderly wealththroughtime. ChapterOne: OverviewoftheLiteratureontheEconomicStatusoftheElderly A. TheEmpiricalLiterature Beforeproceedingwithanydiscussionofempiricalestimatesoftheeconomic statusoftheelderly(personsorhouseholdsheadedbysomeoneage65andover),itis importanttodefinewhatonemeansby"economicstatus." Therearethreeissues worthnoting: 1 KevinA.ColemanandTimothyM.Dall,SynthesisoftheIncomeandWealthoftheElderly: ImplicationsforLongTermCare,submittedtotheHealthCareFinancingAdministration,by Lewin-VHI,June20,1995. • whatvariablesareusedtomeasureeconomicwelfare-economistsusually equateeconomicwelfarewithconsumption. Unfortunately,consumptiondataare sparse,leadingresearcherstouseincomeandwealthasproxiesforconsumption. • theframeofreference-theeconomicstatusofonegroup(here,theelderly)can becomparedtotheeconomicstatusofothergroupsatthesamepointintime(e.g., thenon-elderly)orbycomparingthesamegroupatseveralpointsintime(perhaps comparingthecurrentelderlybeforeandaftertheyretire). • howtomeasurethesevariables-differentstudiesmayusemeans,medians,or othermeasuresofcentraltendency,whileothersmayuseincomeandwealth measurestodefineotherconcepts,suchasmeasuresofrisk(i.e.,howstableisthe currenteconomicstatusoftheelderly). Mostempiricalstudiesconcludethatonaverage,theelderly'seconomicstatus (i.e.,theirincomeandwealth)ishighcomparedtootheragegroups,previouselderly cohorts,ortothecurrentelderly'sstatusatsomepointinthepast. Generally,studies consistentlyfindthattheelderlyhavelowerincomesthanthenon-elderlyorthanthe elderlythemselveshadpriortoretirement,butitisimportanttoputsuchcomparisons intoperspective. Theelderlyoftenneedtoconsumelessthanthenon-elderlyto maintaintheirstandardofliving--theelderlyusuallynolongerfacetheexpenses associatedwithworkingorraisingchildren. Inaddition,theelderlyusuallyhavemuch higherlevelsofassetsthandothenon-elderly,whichalsoaidstheelderlyin maintainingtheirlivingstandardsbeyondtheircontributiontomeasuredincome. Thesebroadcomparisonsoftenmaskimportanteconomicrisksfacedbysome elderlygroups. Higherfractionsoftheelderlythanthenon-elderlyliveinpoverty,and elderlypovertyisespeciallyprevalentamongelderlysinglewomen,theelderlyage85 andabove,andblackelderlyAmericans. Inaddition,theelderlyfaceeconomicrisks thatarenotcommonlyfacedbyothergroups. Forexample,theelderlyfacesubstantial risksofincurringcatastrophicmedicalexpenses,especiallythoseassociatedwithlong staysininstitutionalsettings(i.e.,innursinghomes). ii B. TheTheoreticalLiterature Inadditiontotheempiricalliteraturedocumentingtheeconomicstatusofthe elderly,thereisanextensivetheoreticalliteraturethatattemptstoexplaincurrent patternsofsaving,consumption,andwealthoftheelderly. Therearethreeprimary modelsexplainingthecurrentwealthoftheelderly. Lifecyclemodelsassumethe elderlyholdwealthtoincreasethelevelofconsumptiontheycanmaintain. Thelife cyclemodelimpliesindividualswanttosmooththeleveloftheirconsumptionthrough timetomaintainaconstantstandardofliving. Individualssmooththeirconsumption throughtimebysavingbeforeretirementwhentheirincomesarehighest,andthen spendingdownthesesavingsduringretirementtohelpmaintaintheirstandardsof living. Currentempiricaltestsofthelifecyclemodelareatbestmixed. Studiesusing datafromasingleperiod(crosssectionstudies)tendtocontradictthelifecyclemodel, whilestudiesfollowingindividualsthroughtime(longitudinalstudies)occasionally supportthelifecyclemodel. Theevidenceagainstthelifecyclemodelisnotthatindividualsfailtosaveprior totheirretirement,butthattheseindividualsmaynotbeusingtheirsavingstomaintain theirconsumptionaftertheyhaveretired. Theothertwomodelsofelderlysavings providereasonswhytheelderlymaydecidenottoconsumetheirsavings. First, precautionarymodelsrecognizethattheelderlyfacerisksthatmayaffecttheircurrent consumption. Forexample,theelderlymaynotspendtheirsavingsasrapidlyasa simplelifecyclemodelpredictsbecausetheyareuncertainhowlongtheywillliveor becausetheymayincursomeunexpectedexpense(suchascatastrophicmedical expensesorlong-termcareexpenses)inthefuture. Second,bequestmotivemodels assumethattheelderlymaynotconsumetheirsavingsbecausetheywishtoleave iii theirchildrenandotherheirsbequests. Aswiththelifecyclemodel,theempirical evidencesupportingorrefutingbothprecautionaryandbequestmotivemodelsis mixed. ChapterTwo:EstimatesofIncomeandAssetsoftheElderly ManyoftheestimateswediscussinChapterOneandinourearlier,more extensivereviewoftheliteratureareout-dated. Inaddition,manyoftheseestimates usedatafromasinglepointintime,ratherthandatasetsthatfollowthesame individualsthroughtime. Forthesereasons,weproducedaseriesofnewestimatesof elderlyincomeandwealthmeasuresusingtworecentdatasetsthatfollowindividuals throughtime--thePanelStudyofIncomeDynamics(PSID)andtheSurveyof ConsumerFinances(SCF). A. Income Ourresearchindicatesthattheelderlyandnear-elderlyage,theirincomes decline. From1983to1989,themedianhouseholdincomesofthosepersonswho wereage55andoverin1983declinedby24percent(thePSID). Theseoverall declines,however,maskimportantdifferencesfordifferentincomegroups. During thesesixyears,theincomesofthosewiththelowestinitialincomesin1983(under $10,000in1994dollarsin1983)tendedtoremainunchangedorincrease,whilemost (59to65percent)ofthosewiththehighestincomesin1983(over$30,000) experiencedadeclineintheirincomesof10percentormoreby1989. Ourcross-sectionalestimatesofincomefordifferentgroupsfortheSCFand PSIDagreedcloselywiththoseofotherresearchers. Forexample,medianhousehold incomeforthoseage75andabovein1989(PSID),was$11,500,muchlessthan medianincomesofthoseage65to74($17,500)orthoseage55to64($29,900). In iv addition,elderlymarriedcoupleshadmedianincomesthatwere2.5timesaslargeas thoseofthe singleelderly,andelderlyblackhouseholdshadmedianincomesthat wereapproximatelyhalfthatofelderlynonblackhouseholds. B. WealthandAssets ThelongitudinalestimatesofwealthandassetsforboththePSIDandSCF weregenerallyconsistentwiththelifecycletheory. Forexample,asthelifecycle theorypredicts,theassetsofthenon-elderlyincreasedovertime,whilethoseofthe elderlydecreasedastheelderlyusedtheirassetstomaintainhigherlevelsof consumption. Inparticular,themedianassetsofthoseage35to44,45to54,and55 to64in1983(PSID)increasedby15to24percentby1989,whilethemedianasset levelsdecreasedforthoseage65to74(2.2percent)and75to84(4.7percent)during thesameperiod.Whilethisismildevidencesupportingthelifecycletheory,therelative smallchangesinmediantotalnetassetlevelsisalsoconsistentwithothermodelsof elderlyconsumptionandsaving. Therewasalsoastrikingcorrelationbetweenincomeandassetsinboththe SCFandthePSID. Familieswithhigherhouseholdincomeshadmuchgreatermedian totalnetassetholdings. Forexample,themediantotalnetassetsofelderly householdswithincomesof$50,000were20to40timesgreaterthanthoseofelderly householdswithincomesoflessthan$10,000. Finally,elderlyhouseholdshadmuch highermediantotalnetassetsthannon-elderlyhouseholds(householdswithheads age35to64),aftercontrollingforhouseholdincome. Thismayalsoreflectlifecycle savingspatterns--i.e.,elderlyfamilieshavehadtimetosaveandaccumulatetheir assets. C. TheAffordabilityofLong-TermCare ThedetailedincomeandassetdatainboththePSIDandSCFpermitoneto estimatethefractionofelderlyindividualswhocanaffordtomakelargeexpenditures outoftheircurrenteconomicresources. Forexample,itispossibletoestimatethe fractionofelderlywhocanaffordtopurchaselong-termcareinsuranceorpayforaone yearstayinanursinghome. Inparticular,weestimatedthefractionofelderly householdswithassetsabovegivenlevels($10,000andhigher)whocanafford a long-termcareinsurancepolicythatcosts$1,500to$2,500. Byafford,wemeanthe householdwouldspenduptofivepercentofitsincomeonalong-termcareinsurance policy. Weestimatedthatlessthan15percentofelderlyhouseholdsin1983and1989 couldaffordsuchpolicies;thesepercentageswouldincreaseifweassumedelderly householdscoulddevotemorethanfivepercentoftheircurrentincometopurchasea long-termcarepolicy. ChapterThree: SimulationResults Inthischapter,wereporttheresultsofasimulationmodelwespecifiedthat predictschangesinelderlyassetsusingdatafromthePSID. WeusedPSIDdatafrom 1983to1989insteadofSCFdatabecauseofproblemswithtrackingasufficientlylarge sampleofindividualsoveralongperiod. Thismodelisaversionofalifecycle consumptionmodelthatincorporatesaprecautionarymotiveforsaving. Afterspecifyingourmodel,weidentifiedthemodelparametersthatwerebest abletopredictchangesinnon-housingassetincomefrom1983to1989. By"best,"we meanwechosetheparametersthatminimizethemeansquaredifferencebetweenthe predicted(bythemodel)andactuallevelofnon-housingassetsforallindividualsin 1989. Thismodelaswellasseveralothermodelswetested,however,consistently vi